What began after the Global Financial Crisis in 2008 as an alternative source of capital raising for inventors, innovators, and entrepreneurs has now achieved mainstream acceptance following new changes to Crowd Sourced-Funding (CSF) laws.
Australia’s ‘better late than never’ approach to legal reform has now finally brought the nation into line with the United States, which passed the Jumpstart Our Business Startups (JOBS) Act, also known as “the crowdfunding bill”, into law in 2012. This Act removed the ban on general solicitation of investors which prevented entrepreneurs from publicising that they were raising money.
However, legislating in such a new and emerging area of law came with its own problems, because the US version of ASIC, the Securities & Exchange Commission (SEC) is still catching up and amending its regulatory processes in line with the new laws.
The case was much the same in Australia. Until recently, private companies seeking to raise equity via CSF were obliged to convert to a public company before they were eligible to do so.
In October 2018, amendments to the Corporations Act 2001 (Cth) will come into effect through royal assent to the Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Bill 2017 (Cth). These amendments mean that small private companies with annual revenue of less than $25 million and gross assets below $25 million in value will now be eligible to publish public offers on ASIC-licensed CSF portals. The detail of how such ASIC-licensed CSF portals will operate in practice remains to be seen.
SMEs which fulfil these criteria will be able to raise a maximum of $5 million in any 12-month period. However, these new exemptions are not without restrictions and, in an effort to show the nation that we have learnt from our American cousins’ errors, access to CSF comes with additional governance and reporting obligations which are basically designed to protect investors.
New requirements under the Act include:
- A minimum number of two directors;
- Additional reporting obligations, including notifying ASIC when a private company starts or ceases to have CSF shareholders;
- Additional financial reporting obligations, including additional ASIC annual reports;
- Restrictions on related party transactions; and
- An exemption from takeover rules for private companies with CSF shareholders.
With the jury still out on how the raft of changes to the Corporations Act will play out in practice, we foresee that only the bravest SMEs which fit the bill will take on this challenging alternative investment practice. However, with lending restrictions almost certain to continue, we may see a number of small businesses exploring these uncharted waters as an alternative way to raise funds.
If you’re an SME seeking to take advantage of these recent changes to the law, rest assured that you’re going to require a Shareholder Deed that is agile enough to do so whilst also ensuring compliance with regulatory obligations.
